Q & A's on the Homebuyer tax credit

January 26, 2010
Sorting through the homebuyer tax credit
By CAROLE FELDMAN
Associated Press Writer

WASHINGTON — If you bought a home in 2009, you could be eligible for a tax credit. Figuring out which one can be confusing.
There's one credit for first-time homebuyers and another that primarily benefits homebuyers who owned a home before. But don't mix it up with the first-time homebuyer credit in 2008, which actually was a long-term loan.
There are maximum income levels and maximum sales prices. And vacation homes or rental property don't qualify.

“If you want to spend two hours reading the instructions and translating them and finding out whether you qualify, yes, it's relatively simple,” said Jeff Schnepper, an MSN Money tax expert and author of “How to Pay Zero Taxes.”

Some questions and answers about the homebuyers tax credit:

Q. What's the purpose of the credit?
A. Congress passed the tax credits in an effort to boost the struggling housing industry and fight recession. Indications are that it's had an impact. The National Association of Realtors reported that November sales of existing homes were up 44 percent from a year earlier. Although new home sales dropped in November, figures from the Commerce Department show that they're up 8 percent from the low in January 2009.

Q. How many people are claiming the credit?
A. “In all, 4.4 million households are expected to claim the tax credit before it expires,” Lawrence Yun, the Realtors' chief economist, said.

Q. How many versions are there?
A. There are actually three.
The first credit, for first-time homebuyers, was really a long-term, interest-free loan that has to be paid back over 15 years. The maximum credit was $7,500 for a principal residence purchased between April 9, 2008, and June 30, 2009.
The second iteration made the first-time homebuyers credit a true credit — it doesn't have to be paid back — and raised the amount to a maximum $8,000. It applied to homes purchased between Jan. 1, 2009, and Nov. 30, 2009.
The third change extended the eligibility dates to homes purchased through April 30, 2010. It also added a credit for long-time homeowners who purchased a new residence between Nov. 7, 2009, and April 30, 2010, but at a reduced value — up to $6,500.

Q. Do I automatically qualify if I purchased a house during those periods?
A. No. To qualify, the house has to be used as a primary residence. If purchased after Nov. 6, 2009, it cannot have cost more than $800,000. If you're a long-time homeowner, you had to have lived in the same house consecutively for five out of the last eight years, though you need not have lived in or owned that house at the time you buy your new home.
For homes purchased after Nov. 6, 2009, the credit also begins phasing out for individuals with modified adjusted gross incomes above $125,000, and for married couples filing jointly with incomes above $225,000.

Q. How does the Internal Revenue Service define a principal residence?
A. “Your main home is the one you live in most of the time,” the agency said. “It can be a house, houseboat, mobile home, cooperative apartment or condominium.”

Q. How do I claim the credit?
A. There's a form, 5405, to fill out. You'll also have to submit a copy of your settlement statement, usually Form HUD-1, with the names and signatures of all parties, the property address, the sales price and date of purchase.
To avoid refund delays, the IRS recommends that long-time homeowners who purchase a new home also provide documents to show they meet the requirement for consecutive years lived in their old house. These can include mortgage interest statements, or property tax or homeowner's insurance records.

Q. Do I have to wait until I file my 2010 taxes to claim the credit for a home purchased before the deadline in 2010?
A. No. “You can choose to claim the credit on your 2009 return for a home you bought in 2010 that qualifies for the credit,” the IRS said.

Q. I purchased my home in 2008 and filed for a credit on my tax returns. Do I still have to pay it back?
A. Yes. When Congress did away with the repayment requirement, it did not do so retroactively.

Q. What if I want to keep my original house and use it as a rental property?
A. If you qualify for the credit as a long-time homeowner, nothing in the law requires you to sell the original house. However, you must make the new one your primary residence.

Q. What if I decide to sell the house I got the credit for or convert it to a rental property?
A. You will have to pay back the credit if you don't keep the purchased house as your permanent residence for three years.

LAND ENTITLEMENTS

Real Estate Dictionary: Entitlement--The right to develop land with government approvals for Zoning density, utility installations, occupancy permits, use permits, and streets.

In essence, Land Entitlement is what happens with a project before a shovel of dirt is turned.

Entitlements are the backbone of any development. Entitlements dictate “what, where and how much” can be built on a particular property. The “what, where and how much”—have a lot to do with determining the value of a property. A property that has a large number of uses is typically more valuable than the same property with a very limited use.

Entitlements are a legal agreement with the governing jurisdiction to allow a certain development to occur on the site. Entitlements outline the density, function and setback requirements allowed for the property.

Typically, developments can only be financially viable if they can obtain a certain density or usage. Entitlements are the key to legally securing this right from the governing jurisdiction.

When reviewing a development application, a jurisdiction will consider potential impacts such as traffic and environmental risks as well as community acceptance of the proposed development. They will likely require studies from the owner as well as proposed conceptual designs of the project.

Applying for entitlements is a challenging process. Depending on the size of the project and intended use, entitlements can take from a few months to many years to obtain. This is in large part based on the complexity of the project and public acceptance of it.

Community Banks Must Lend

I agree, the construction sector has been hit harder by this economic downturn than any other industry. Additionally, Pat Hillyer raises a sound point, "we" need to let our legislators know what is going on. We need banks to start lending to our local builders to bring jobs back.

The Miter Box
A Cross-Section of News and Opinion--Julianna Ross
With unemployment at historically high levels and billions of dollars flowing into the financial sector from Federal bailouts, taxpayers expect the needs and provisions to eventually intersect and provide relief to so-called ordinary Americans. Extensions of unemployment benefits and first time homebuyer tax credits are nice, but it’s hard to erase the vision of financial fat cats rolling in enormous pay bonuses just months after enjoying bailout dollars plucked from the pockets of the nearest newborn.

Irrefutably, no single industry has been hit as hard in this economic correction as construction. The construction sector is unique because it encompasses numerous and diverse fields factored into the GDP including real estate, utilities, wholesale, local government, forestry, manufacturing, transportation and warehousing, waste management, and science (a burgeoning profit center churning out all those new-fangled sustainable products). Yet mention homebuilder’s plights these days and it seems like every politician, regulator and lender is content to ignore one of our country’s most potent employment engines.

“Banks are so focused on the mess they’ve created for themselves,” says Nick Schmitt, a local private investment and banking consultant. “They are focused on their problem loans instead of the future. Once TARP is gone, banks will have to turn to entrepreneurial ways to generate new loans.” In a climate where many builders say it’s hard to even get a bank’s attention unless they stop paying on their loans, there is no reward for good behavior and understandable frustration. “I’m being forced into an early retirement,” says one Seattle builder, 42, who has as an exemplary lending track record. This is a builder fueling the other small businesses of local suppliers, employing staff and quickly selling through his stock of well-designed homes, even throughout 2008 – 2009.

Martha Rose, one of King county’s first spec builders of sustainable housing, launched an ambitious letter writing campaign on behalf of her business and the opportunity she sees as having a permanent impact on how people build. “The letter explains that spec construction loans must be made available to builders of homes that are super energy efficient. Green builders do not have access to other sources of funding and currently are lumped together with all spec builders,” she writes on her blog. The letter is to accompany an individual or business moving their money out of federally funded banks and into community banks, in return for the local banks agreeing to lend again, this time to responsible and environmentally minded builders.

Unfortunately, it is now the commercial credit crisis that has many of those community banks landing in the regulation handcuffs of their bigger brethren. Everyone agrees, the old days are gone and aren’t coming back. What option does an entire segment of industry have in a time like this?

One source cites Oregon Congressman Jeff Merkley’s bill titled Banking on our Communities (www.merkley.senate.gov). It strives to put TARP funds to work in partnership with private investors, recapitalizing community banks so they can lend again to small businesses and consumers. In fact, private investors could be the biggest winners coming out of the crisis, as builders begin imagining new partnerships and ways of securing funding. “We all know when a void is created, it gets filled,” says Scott Cameron of Windermere. “The banks need a plan, because they’ve created a void.”

The NAHB’s Put Housing First coalition was successful in lobbying for the $8,000 first time homebuyer credit and also its extension. Now it’s time to form a new coalition and let our elected officials know that we want community banks lending to community builders and bringing back jobs. “Our banks and our legislators don’t understand, and it’s our fault,” states Pat Hillyer of Umpqua Bank. “You’ve got to let them know what’s going on.”

Senator Patty Murray’s office recently reported holding dozens of meetings with small builders and is introducing legislation after the Thanksgiving break to focus credit and support on community banks lending to local builders. “Start a parade, and I’ll lead it,” Senator Warren G. Magnuson once said, and it is time to get this parade started and push our elected officials to lead. The needs and contributions of Main Street homebuilders cannot be ignored.

-- Julianna Ross, Publisher, The Builder’s Journal
The Miter Box is an ad-hoc column welcoming opinions about all topics concerning the residential building market, particularly as they pertain to King and Snohomish counties of Washington State.

Rural zoned condominium lot

A family owned some property in the rural area of King County. The property included the main home as well as a secondary home that was built many years ago. They wished to have the ability to sell one of the homes and keep the other.

The normal way would be to subdivide the property via a short plat. Short platting the property probably would have cost them about $110,000 for applications, engineering, site construction, bonding etc. and taken about 3 years to complete. Unfortunately, they didn’t even have enough area (a large enough lot) to subdivide, so that wasn’t an option.

In talking with their engineer, they learned of a creative solution for their problem. Cramer Northwest Inc. advised them to do a Condo Survey. The Condo survey accomplished their objective utilizing a different code. In the end, they got their two lots (just like in a short plat) but at a fraction of the time and expense of one.

Method..............~Cost............Time

Short Plat.................$110,000...........3 years
Condo Survey..........$9,500...............7 months

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Savings................91%..............80%

Disclaimer: The codes in your jurisdiction may not be the same. The key to this example is that the clients had two existing homes on the same lot. Please consult a professional such as Cramer Northwest http://www.cramernw.com/ to discuss your particular case.